Comparing Berkshire Hathaway’s (BRK.A) December 31, 2008 13-F with its March 31, 2009 13-F, I made the following observations for Q1/2009:

• BRK didn’t add any new positions to its portfolio
• BRK didn’t fully liquidate any positions in its portfolio
• BRK added shares in seven stocks: BNSF Railway (BNI), Union Pacific (UNP), Wells Fargo (WFC), U.S. Bancorp (USB), Johnson & Johnson (JNJ), and Nalco Holding Company (NLC)
• BRK reduced shares in four stocks: CarMax (KMX), ConocoPhillips (COP), Costco Wholesale Corporation (COST) and Constellation Energy Group, Inc. (CEG)

Of the stocks held in BRK’s 13-F portfolio, the following ones are either held in my income portfolio or are on my watch list of dividend stocks:

Coca Cola (KO) – Yield 3.34% – Analysis
The Coca-Cola Company is the largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world.

Johnson & Johnson (JNJ) – Yield 3.55% – Analysis
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the healthcare field.

Kraft Foods (KFT) – Yield 4.44% – Analysis
Kraft is engaged in manufacturing and marketing packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products.

Lowes Companies (LOW) – Yield 1.89% – Analysis
Lowe’s Companies, Inc. is a home improvement retailer.

M&T Bank (MTB) – Yield 5.57%
M&T Bank Corporation is a bank holding company. As of December 31, 2008, the Company had two wholly owned bank subsidiaries.

Procter & Gamble Co. (PG) – Yield 3.39% – Analysis
The Procter & Gamble Company is focused on providing branded consumer goods.

Wal-Mart Stores, Inc.  (WMT) – Yield 2.19% – Analysis
Wal-Mart Stores, Inc. operates retail stores in various formats worldwide.

In addition, Buffett continues to hold a position in several stocks that I sold over the last twelve months for either cutting or failing to raise their dividend. Those are:

Bank of America Corporation (BAC) – Yield 0.35%
Bank of America Corporation (Bank of America) is a bank holding company and a financial holding company.

General Electric (GE) – Yield 9.20%
General Electric Company is a diversified technology, media and financial services company.

The Home Depot, Inc. (HD) – Yield 3.89%
The Home Depot, Inc.is a home improvement retailer selling an assortment of building materials, home improvement and lawn and garden products, and provide a number of services.

SunTrust Banks, Inc. (STI) – Yield 3.04%
SunTrust Banks, Inc. is a diversified financial services holding company whose businesses provide a range of financial services to consumer and corporate clients.

U.S. Bancorp (USB) – Yield 1.04%
U.S. Bancorp operates as a financial holding company and a bank holding company. U.S. Bancorp provides a range of financial services, including lending and depository services, cash management, foreign exchange, and trust and investment management services.

It is not surprising that the most famous value investor holds several dividend stocks. Historically, stocks that pay dividends have out-performed those that don’t. When you buy dividend stocks at a discount, it’s like turbo-charging your return!

Full Disclosure: Long in JNJ, KO, MTB, PG, WMT . See a list of all my income holdings here.

Unlike the athletes in the Olympics, attributing an impressive dividend performance to drugs is a good thing for Abbott (ABT). The company is a diversified life science company is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics. This week the company announced it has increased its quarterly common dividend 11% to $0.40/share. The dividend yield on ABT shares is over 3%. This is the 37th consecutive year ABT has raised its dividend. Linked here is my most recent analysis of ABT.

Colgate-Palmolive Co. (CL) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories. This week CL announced that its Board approved a 10% increase in its quarterly dividend to $0.44/share. It is payable on May 15, 2009 to shareholders of record as of April 24, 2009. The dividend yield on CL shares is over 2.5%. This is the 46th consecutive year CL has raised its dividend.

The Chubb Corp. (CB) is one of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage. CB last week declared a $0.35/share  quarterly dividend payable April 7, 2009 to shareholders of record on March 20, 2009.  This represents a 6.1% increase to $0.35/share. The dividend yield on CB shares is over 3.5%. This is the 44th consecutive year CB has raised its dividend.

Kimberly-Clark Corp. (KMB) is a leading consumer products company’s global tissue, personal care and health care brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex, Scott and Kimberly-Clark.  KMB announced a 3.4% dividend increase bringing the quarterly dividend to $0.60/share. It is payable on April 2, 2009 to stockholders of record on March 6, 2009. This is the 37th consecutive year KMB has raised its dividend. The dividend yield on KMB shares is 4.92%.  Linked here is my most recent analysis of KMB.

Other select companies recently raising the dividend bar include:

• Tim Hortons (THI) Raises Qtr. Dividend by 11.1% to $0.10/share (yield 1.32%)
• ITT Corp. (ITT) Boosts Qtr. Dividend by 22% to $0.2125/share (yield 2.15%)
• Thomson Reuters (TRI) Boosts Qtr. Dividend 17% to $0.28/share (yield 4.38%)
• Westar Energy (WR) Raises its Qtr. Dividend by 3.4% to $0.30/share (yield 6.93%)
• PepsiAmericas (PAS) Boosts Q1 Dividend (yield 3.36%)
  

For more companies around the world with a long string of consecutive dividend increases, see Dividends Value’s Stock Ideas page.

Full Disclosure: Long KMB

(Photo: Steve Woods)

- Above-referenced Bloomberg Article

Once considered to be the best run bank in America by many analysts, WFC is starting to struggle. Did the WFC executives turn a blind eye to the underlying financial data and only focus on the prize they had been eying for some time? From an outsider looking in, this appears to be the case. After a much larger loss in the fourth quarter than expected, most analysts that follow the bank believe a dividend cut is inevitable and, like BAC, a second trip to the TARP trough could be in the works. Are the shareholders possibly looking at a $0.01 dividend in the future?

Analysts from Friedman, Billings, Ramsey & Co. in a January 29 note pointed out that WFC only remained “well capitalized” by regulators’ lights because of the government’s $25 billion TARP injection. WFC’s 7.88% capital cushion does not compare well with other troubled banks such as Citigroup (11.8%), J.P. Morgan (JPM) (10.8%) and Bank of America (10.7%).

Other warning signs include a sharp increase in the amount of assets held for sale $178 billion from $106 billion in the prior quarter. Goodwill climbed to $23 billion from $14 billion. In this environment, goodwill is a difficult asset to justify to the auditors and ultimately to the Securities and Exchange Commission (SEC). Could future impairments be in the works, as Wachovia did in its final days?

There is reason to be concerned. Though the actors are different, I have seen this play before and the outcome is tragic.

Full Disclosure: No position in the aforementioned stocks.

I. S&P 500 Dividend Aristocrats

These stocks are the best of the best – the blue blood stocks. S&P maintains the list. Here is a description from their site:

S&P 500 Dividend Aristocrats is designed to measure the performance of S&P 500 index constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. This index is a member of the S&P Dividend Aristocrats index series.

Index constituents exhibit the following characteristics:

• Underlying Indices – S&P 500
• Weighting – Equally weighted; Constituents re-weighted quarterly
• Reconstitution – Reviewed annually in December

Members may be deleted during the December rebalance if calendar-year dividends did not increase from the previous year, or intra-year if the stock is removed from the underlying S&P 500.

Among others, Dividend Aristocrats include these highly recognizable names:

• Clorox Co (CLX)
• Coca-Cola Co (KO)
• Exxon Mobil (XOM)
• Johnson & Johnson (JNJ)
• McDonald’s Corp (MCD)
• Procter & Gamble (PG)
• Wal-Mart Stores (WMT)

II. US Broad Dividend Achievers™ Index

This index is maintained by Idxis. Here is the description from their website:

The Broad Dividend Achievers™ Index is comprised of companies incorporated in the United States or its territories, trade on the NYSE, NASDAQ or AMEX, and have increased their annual regular dividend payments for the last ten or more consecutive years. In addition, Indxis requires that a stock’s average daily cash volume exceed $500,000 per day in the November and December prior to the annual reconstitution date on the last trading date in January. The Index is calculated using a modified market capitalization weighting methodology and has been published by the American Stock Exchange under the ticker symbol DAA since December 5, 2003.

Select US companies with at least ten consecutive years of increasing regular dividends. US companies must be listed on the NYSE, AMEX or NASDAQ. US Companies must have a minimum average daily cash volume of US$500,000 per day for the November and December prior to each Annual Reconstitution Date.

Here are several prominent companies that are Dividend Achievers:

• Chevron Corporation (CVX)
• Donaldson Company (DCI)
• McCormick & Co. (MKC)
• Wells Fargo & Co. (WFC)

III. International Dividend Achievers™ Index

This index is maintained by Idxis. Here is the description from their website:

The International Dividend Achievers™ Index is designed to track the performance of dividend paying American Depositary Receipts and foreign common stocks trading on major US exchanges. To become eligible for inclusion in the International Dividend Achievers Index a stock must be incorporated outside the United States, trade on the NYSE, NASDAQ or AMEX, and have increased its annual regular dividend payments for the last five or more consecutive years. In addition, Indxis requires that a stock’s average daily cash volume exceed $500,000 per day in November and December prior to each annual reconstitution in January. The Index is calculated using a dividend yield weighting methodology and is calculated by American Stock Exchange under the symbol DAT since August 1, 2005.

To become eligible for inclusion, a company must be incorporated outside of the United States. The companies must be have an American Depository Receipt or common stock trading on NYSE, NASDAQ or AMEX. Companies must have paid increasing regular annual dividends for five or more consecutive years. The average daily cash volume must exceed $500,000 in US$ in the November and December prior to reconstitution.

The International Dividend Achievers are filled with companies that touch our lives on a daily basis including:

• Toyota Motor Corp. (TM)
• Panasonic Corp (PC)
• Nokia Corp. (NOK)
• BP p.l.c. (BP)
• Canadian National Railway Company (CNI)

IV. The U.S. Dividend Champions

This list is maintained by Dave Fish of MoneyPaper is regularly updated and located at the The Drip Investing Resource Center. Here is a description from the spreadsheet:

The initial goal was to identify companies that had increased their dividend for at least 25 consecutive years, but, as explained below, the definition was broadened to include additional companies that had paid higher dividends without having increased the quarterly payout in every calendar year. I also decided to follow companies that had increased their dividend for 20-24 straight years, since they are likely to join the 25-year “Champions” soon. It was also necessary to resolve discrepancies between the streak claimed by the company and information from outside sources, which is why the “(Per Company)” sub-title is included.

All the U.S. Dividend Champions names may not be as familiar, but it includes some smaller companies not found on the other lists such as:

• Florida Public Utilities (FPU)
• Bowl America (BWL.A)
• Middlesex Water Co. (MSEX)
• Telephone & Data Sys. (TDS)
• Weyco Group Inc. (WEYS)

Bringing It All Together

The above four lists contain a significant number of companies, and unfortunately a great deal of duplication. I am in the process of building a single list that eliminates the multiple entries for the same company. It is my goal to eventually have a minimum amount of analysis on each company. To that end, I have posted an aggregated list as Stock Ideas under the Analysis section. It is still very rough around the edges, but keep checking in, it will get better as time passes.

Not every stock listed is a great dividend investment, but virtually all great dividend investments are on the list.

Full Disclosure: Long BP, CLX, CNI, CVX, JNJ, KO, MCD, PG, WMT

(Photo: ilker)

The TARP money comes with strings. One of which is a reduction of common dividends. BAC declared a first-quarter dividend of $.01 per share. The company’s previous two dividends were $0.32 and $0.64 per share. Not to be out done, Citigroup (C) declared a quarterly dividend on the company’s common stock of $0.01 per share. Its last two dividends were $0.16 and $0.32 per share.

Tuesday, concern spread to Wells Fargo (WFC) after analysts at Friedman Billings Ramsey said Wells Fargo will likely cut its dividend in the first half of the year because the bank needs to conserve cash. That resulted in a 20% drop in its share price. Then yesterday, SunTrust Banks, Inc. (STI) reported a fourth quarter loss of $1.08 per share and reduced its quarterly dividend from $0.54 to $0.10 per share.

While the big banks are taking government funds and slashing dividends, here are some smaller banks standing strong by raising dividends:

• Bar Harbor Bankshares (BHB) raises dividend by 4% (Yield: 4.68)
  
• Hudson City Bancorp (HCBK) increases qtr. dividend to $0.14/share (Yield: 4.68)
• Comm Bancorp (CCBP) boosts qtr. dividend from $0.27 to $0.28/share (Yield: 2.86)
• Westamerica Bancorp (WABC) Boosts Qtr. Dividend $0.01 to $0.36/share (Yield: 3.36%)

Today’s market has been challenging to even the most seasoned investors. Dividend stocks provide an opportunity for long-term growth and income if we follow a few simple rules.

Disclosure: No position in the aforementioned securities.

(Photo: Steve Woods)

In a report issued last Friday, the Congressional Budget Office (CBO) concluded that the Treasury lost more than 25% of the $247 billion it spent as of Dec. 31 bailing out banks, according to a report released on Friday.

The CBO used a modified Black-Scholes option pricing model to value the TARP assets. The calculation was based on the present value of the dividends banks are required to pay taxpayers on the warrants issued in exchange for the funds received. The present value of the warrants was only $183 billion at December 31st, resulting in the Treasury providing a “subsidy” to the banks of $64 billion.

Terms of the TARP agreement require banks to pay back 5% annually in dividends for the first five years, and 9% after that if taxpayers haven’t been repaid. The warrants expire in 10 years. Last Thursday, Lawrence Summers, President-elect Barack Obama’s chief economic advisor, promised that the incoming administration would take steps to improve returns on TARP funds for taxpayers, in part by limiting dividend payouts to shareholders.

Prominent financial companies participating in TARP include:

• American Express Company (AXP)
• Bank of America Corporation (BAC)
• BB&T Corp. (BBT)
• U.S. Bancorp (USB)
• Wells Fargo & Co. (WFC)

Some institutions, such as Bank of America, have returned to the trough to feed again off TARP funds. As dividend investors, we must carefully consider whether or not banks participating in the TARP program should be included in our income portfolios.

Full Disclosure: Long BBT, USB

I. Procter & Gamble Co. (PG )

• RQ: A1
• Yield: 2.49%
• Buy Below: $59.70
• 12/1/2008 Close: $60.49
• % Change since 12/31/2007: -17.6% ($73.42)

II. Wells Fargo & Company (WFC)

• RQ: A2
• Yield: 4.71%
• Buy Below: $26.44
• 12/1/2008 Close: $23.41
• % Change since 12/31/2007: -22.5% ($30.19)

III. Kimberly-Clark Corporation (KMB)

• RQ: A2
• Yield: 4.02%
• Buy Below: $52.87
• 12/1/2008 Close: $55.02
• % Change since 12/31/2007: -20.7% ($69.34)

IV. Progress Energy, Inc. (PGN)

• RQ: A5
• Yield: 6.20%
• Buy Below: $36.95
• 12/1/2008 Close: $37.73
• % Change since 12/31/2007: -22.1% ($48.43)

V. The Coca-Cola Company (KO)

• RQ: A2
• Yield: 3.24%
• Buy Below: $45.35
• 12/1/2008 Close: $44.33
• % Change since 12/31/2007: -27.8% ($61.37)

When the market is in a free-fall, it is important to concentrate on quality. Each of the above stocks has a RQ rating of A5 or better. Their share price has declined significantly less that the 44.1% decrease of S&P 500 as measured by VFINX ($135.15 down to $75.54). I suspect Monday was not the last after-Thanksgiving sale of 2008.

As always, you should perform your own research and reach your own conclusion before buying or selling an investment security.

Full Disclosure: As of this writing, I was long in VFINX, PG, PGN and KO

The goals of an income portfolio are different than those of a capital appreciation based portfolio. The good news is an income portfolio consisting of dividend stocks can not only succeed, but excel during a down market.

The goal of dividend investors is to build a steady stream of rising income from solid companies. While everyone else is panicked about their portfolio’s decline, income investors see the downturn as an incredible buying opportunity.

II. When The Chips Are Down, Go For The Blue Ones

In what seems to be a perpetually declining market, one of the true bright spots is the ability to strategically pickup some bargains in the bluest of blue chip stocks. Normally, these stocks are difficult to buy due to a built in “safety” premium for times like these. Over-allocate safe stocks and save the risker investments for when they are needed (more later). Here are some traditional dividend stocks that that have a RQ rating of A3 or better with their buy below price:

• Canadian National Railway (NYSE:CNI) – RQ: A2 – Buy Below: $38.78
• Chevron Corp (CVX) – RQ: A3 – Buy Below: $72.91
• Illinois Tool Works Inc (ITW) – RQ: A1 – Buy Below: $47.29
• Johnson & Johnson (JNJ) – RQ: A1 – Buy Below: $67.70
• Kimberly-Clark Corp (KMB) – RQ: A2 – Buy Below: $52.87
• The Coca-Cola Company (KO) – RQ: A2 – Buy Below: $45.35
• PepsiCo, Inc. (PEP) – RQ: A1 – Buy Below: $70.61
• Procter & Gamble Co. (PG) – RQ: A1 – Buy Below: $59.70
• Sysco Corp (SYY) – RQ: A1 – Buy Below: $24.91
• United Technologies Corp (UTX) – RQ: A1 – Buy Below: $56.27
• Wells Fargo & Co (WFC) – RQ: A2 – Buy Below: $26.44

III. Sometimes You Will Misfire

As hard as we may try to pick all winners, sometimes a good stock will go bad, cut its dividend, and we’ll have to sell it. Often it is one of our higher yielding stocks, leaving a large void in our annual dividend income. How do we manage this? Here is what I do:

1. First, when you suspect a stock might cut its dividend put it “On the Shelf” and don’t make any future purchases, until you are convinced the dividend will not be cut.
2. Manage the risk of a dividend cut by limiting your allocation to any single stock to a maximum of 5%.
3. Keep some high risk/high yield allocation in reserve. As mentioned above, when the market goes south, we need to under-allocate high risk/high yield stocks. This will allow room in our allocation to selectively purchase these types of stocks when we choose to sell a past performer that is no longer meeting our expectations.

Over the last 2 months, I have had the opportunity to put the above principles into practice. For the year, I have sold five stocks after they cut their dividend. Fortunately, I was able to replace them without suffering a loss in income. As your income portfolio grows, you will not always be able to replace the lost income, but the above principles will help you minimize the decline.

IV. Don’t Let Fear Derail Your Long-Term Plan

Someone once said, ‘Your emotions are the best inverse indicator of what you should be doing in the market’. Many people are selling it all and walking away from the market. They’ll be back though – when the market is reaching all time highs, only to get out when it begins to fall with no end in sight. This is a long-term recipe for disaster. For those of us who still have time before retirement, the market is presenting us with a golden opportunity; what are we going to do with it?

Full Disclosure: Long CNI, ITW, JNJ, KO, PEP, PG, SYY and UTX

Company Description: Wells Fargo & Co provides banking, insurance, investment, mortgage and consumer finance services throughout North America.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

WFC is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, WFC is trading at a 7.1% premium. WFC had a Star deducted for trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

WFC earned two Stars in this section for 3.) and 4.) above. WFC has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 21 consecutive years. It’s one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA

WFC earned both of the available Stars in this section. The NPV MMA Diff. of the $14,568 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as WFC has. WFC’s current yield of 4.99% exceeds the 4.61% estimated 20-year average MMA rate.

Other: WFC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. WFC has a strong customer base and a well diversified capital base. Recently, WFC prevailed in a legal dispute with Citigroup (C) over its planned purchase of Wachovia (WB). This will provide WFC exposure in the fast growing southeasten portion of the U.S. WFC should to continue to gain market share. WFC risks would include credit deterioration spreading to some of its other asset classes.

Conclusion: WFC lost one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks WFC as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $32.59 and WFC’s NPV MMA Diff. would still be around the $7,500 NPV MMA Diff. that I like to see. At that price WFC would yield 3.99%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $7,500 NPV MMA Differential I’m looking for, the calculated rate is 6.0%. This dividend growth rate is slightly below the 8.7% used in this analysis.

What a difference a few days makes. When I selected WFC for an analysis it was a 5 Star-Strong Buy, then its price increased above the 5% premium level and lost a net of 2 Stars. If I was looking to open or add to a position in WFC, I would wait for it to dip below $26.44.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in WFC (0.0% of my Income Portfolio) .

What are your thoughts on WFC?